Experts Rip Bank Stress Tests, Dividend Increases

Most U.S. banks fared well in the Federal Reserve’s stress tests, whose results were announced this week. But some experts beg to differ.

The Fed decreed that 15 of the 19 big banks its investigated would be able to maintain a minimum capital level during a severe economic crisis.

Anat Admati, a Stanford professor of finance and economics, wasn’t impressed with the central bank’s methodology.

“The Fed has essentially appeased critics and proclaimed the banks healthy without doing real due diligence,” she tells The New York Times.

The banks given a clean bill of health moved quickly afterward to increase their dividends and announce share buybacks.

Many experts think that’s a bad idea, given the shaky state of bank balance sheets, which makes the institutions vulnerable to shock.

“It’s frankly irresponsible to allow banks to quickly empty their coffers,” Neil Barofsky, former inspector general of the bank bailout (Troubled Asset Relief Program), tells The Times. “They should be holding onto this money.”

He says the stress tests may well have overestimated the banks’ strength. The Fed’s assumptions in conducting the tests were too rosy, some experts say.

To be sure, not all bank experts were disappointed by the results.

They show “this industry for the last year has been doing extraordinarily well," Rochdale Securities analyst Dick Bove tells the Los Angeles Times. He has been bullish on bank stocks throughout that period.